Not only is it hard to attract talent to your startup (know any free developers in the Bay Area?), as a founder you also have to set the proper structure. A common saying is that you need a “Hacker, Hustler, and a Hipster” on the founding team. In the earliest days that makes sense, especially when you are MVPing and hustling for your first customers trying to find a product-market fit.

Sometime after you have product-market fit and raise a round of funding, you need to hire outside of the core founding team. A lot of founders struggle with the right roles to hire and what the proper structure should be. Some founders hire too many engineers (typically non-technical founders) and some founders hire too many “business” or “marketing” people (typically technical founders), leading to being lopsided in one area. Founders run the risk of being engineering centric or marketing centric in their product development. In reality they need to be customer centric and embrace the Holy Trinity of Product Development.

The Holy Trinity of Product Development: Dev Lead, PM, PMM

When it comes to product development, you need three distinct roles. Those roles are what I call the Holy Trinity of Product Development: Developer Lead,Program Manager (PM), and Product Marketing Manager (PMM). These three roles work together to represent the customer and build the business, ensuring that you are not too engineering focused or too marketing focused. The role in the middle of that fine line is the Program Manager.

Program Manager (PM)

The program manager, sometimes called product manager, is the most important role in the trinity. The PM manages the product definition by talking with customers and potential customers. A PM owns the UX and functional specs and is the chief customer advocate. A PM not only owns the product definition, but also its strategy, position in the marketplace, and if it is a new product, its go to market strategy. Internally, the PM has to coordinate the teams to get the product out the door. This means working closely with the PMM and business teams on what makes sense for the business. The PM can’t set pricing (that is the PMM’s job) but surely can influence it. At the same time the PM has to work with the engineering team to get the product built on time and on budget. While a PM is not required to have any technical or coding skills, the more technical a PM is, the better. At Facebook for example, all PMs usually can write a little Javascript code. This allows the PM to talk to the engineering team in their own language.

What is amazing about the PM is that they have no power or authority over the PMM or dev lead, all they can do is influence the engeneering and marketing teams. It takes a unique skill set to get this done.

Developer Lead

The dev lead has a difficult role to play insofar as they have to represent the engineering team to the PM and PMM as well as work on all of the “tech stuff.” The tech stuff includes: setting the development architecture, get their DevOps game on by organizing the build (doing things like Continuous Integration and Continuous Deployment), coding, and choosing the right technology for the job (Rails or PhP anyone?) The dev lead also needs to keep the engineering team together and motivated and make sure that the agile process is, well, agile.

The hardest part of the dev lead’s job is interfacing with the PM and PMM. The nature of startups is that they are resource constrained and always in a rush to get something shipped. That means an insane amount of pressure on the engineering team. It is the dev lead’s responsibility to work with the business (PM and PMM) in order to set realistic deadlines and proper expectations, all while not being the guy complaining about lack of resources. Not always an easy task..

Product Marketing Manager

While the dev lead represents the engineers and the PM represents the customer, the PMM represents the business. While the PMM is responsible for what all non-marketing people think of as marketing (ad campaigns, trade show booths, email blasts, product placement, media placement, etc), they are also responsible for the business model of the product and making sure that the product makes money (or reaches its broader goals if it is a loss leader.) This means setting pricing, and if this is a freemium product, that is far more complex than you can ever imagine. The PMM is ultimately accountable for the product making money.

The Right Balance

Some startups and companies are tempted to combine the PM and PMM role. This is bad! What happens when you combine these roles is that the focus usually becomes either too customer centric or too marketing centric; you need two people and two distinct roles to prevent this from happening. The right structure creates the right environment. The right people in the wrong structure is a waste of talent, they will not be able to use all of their talents, they will spend too much time fighting the incorrect structure. No amount of free massages, free lunches, and unlimited cookies will fix an improper structure. (Actually it is Google, Facebook, Linkedin, etc who have pioneered the Holy Trinity in Silicon Valley. They adapted it from the larger tech companies such as Microsoft in the 1990s.)

The right people in the right structure/environment is where the magic happens.

This may sound like a lot of overhead, however, you are probably doing this in some form already. Typically at the early stage, founders take on these roles and hire people to pass them off to. It’s a sign that your startup has matured and left the experimental phase.

Everyone is talking about replicating and building the “next Silicon Valley” with the rise of Silicon “roundabouts” and Silicon “beaches” in several locations around the world. While this is going on very few people are talking about how Silicon Valley is evolving: specifically that Sand Hill Road is now the Wall Street of the West Coast.

The rise of the “Uber” Round

More and more tech startups are raising hundreds of millions or even billions of dollars in later stage “uber” rounds. (I call these the “uber” rounds as a play on the German for “super” or after the company Uber that has raised well over $4 billion in Venture Capital.) As of this writing, Lyft has just closed a $680 Series E. According to Crunchbase, Lyft is one of 20 startups that have raised $1B or more in venture funding in the past 5 years.

Companies are going public later and later, a trend started by Facebook; instead of rushing to an IPO, companies are staying private longer and are taking more and more uber rounds. (Some people think that these companies should be going public as the investing public can’t participate in the later stage growth, allowing the rich to get richer.) The average amount of money that companies have raised before going public has been going up, more than double since the 2008 downturn.

What is Going On?

Most pundits think that companies are staying private longer to avoid the hassle and expense of going public as well as regulations like Sarbanes-Oxley. While those are all reasons to stay private, the real reason is that Silicon Valley VCs on Sand Hill Road have evolved to grow larger and focus on late stage massive growth.

Typically an IPO is for massive growth. A company will get to a certain stage of maturity and then raise anywhere from $300m to over a $100b at an IPO. The IPO accomplishes a few things: allows early investors and employees to “cash out” and sell their shares to the public as well as provide much needed capital for massive growth.

Today companies are delaying the IPO and raising the growth capital with their uber rounds. On the surface this looks crazy. But in reality, it is genius.

Lean Startup and Uber Rounds

Let’s take a made up startup LeanCo as an example. Assume LeanCo already took a Series A ($8m) and Series B ($30m). Now they are kicking butt and are growing at the same rate as the other high performing startups. Say they have well over $250m in sales, expanding market share, healthy margins, and are expanding internationally. This is the textbook case for an IPO.

What would happen is that LeanCo would go to a big Wall Street bank and raise approximately $5-$10+ billion in an IPO. After all the costs and fees and the Wall Street bank’s cut, the company would have a lump sum of money, let’s just say $5b. Now the company has the war chest it needs in order to grow. Typically LeanCo will acquire smaller rivals, enter new markets, and build out new products and services.

Instead, the LeanCos are choosing to raise billions for growth before an IPO. Instead of raising $5b in an early IPO, they are raising $2-5b privately before a much later IPO (at a much higher valuation.) They are raising the money $400 or more at a time. Here lies the genius of this approach: LeanCo only raises what it needs, when it needs it in a private (closed) market that will provide a higher valuation than a public one. There are also other benefits to staying private during the growth stage, like not disclosing your financial health and spending to competitors.

For the investors, this is actually a much more conservative approach. By only giving LeanCo the money when it is needed and doing it incrementally, LeanCo has to operate in iterative cycles similar to the Lean Startup and Agile Development. For example, if investors provided LeanCo with $5b in one lump sum, LeanCo may spend it unwisely feeling that they have a lot of capital on hand. If investors give LeanCo $400m or so at a time, LeanCo will have to take an incremental approach. If LeanCo were to go under after an IPO, investors would lose all of the $5b. If LeanCo were to fail after raising “only” $2b, investors lose far less money.

The Post-IPO World

The VCs on Sand Hill Road in Menlo Park have changed the game. I remember in the .com bubble, the largest Venture Fund was $1b and the largest deal was around $75m. Now the VC funds on Sand Hill Road are all well over a few billon each and think nothing of leading a $500m round.

Eventually the startup companies are going public, however, that is only because at some point they have to in order for the VC investors to sell their positions and the employees to cash in their stock options. I’m sure that over time, Sand Hill Road will evolve past the IPO, where companies stay private forever and large East Coast financial institutions buy back those positions from the VCs and earn returns via dividends, etc. You are already starting to see the signs of this when large pension and investment banks such as Fidelity, T. Rowe Price, and Goldman Sachs are part of the last round of financing for companies like Lyft, Box, and Uber. In the future, you won’t be able to buy shares in a Facebook individually, but you will buy shares in a Fidelity “Silicon Valley" Mutual Fund. Silicon Valley is disrupting Wall Street.

What Does this Mean for Startups in Silicon Valley

We all know that New York City and Wall Street is the IPO center of the world. Did a startup have a competitive advantage by being located in New York? As a native New Yorker who built three startups in New York City, I can confidently say no. Mark Zuckerberg proved that when he showed up to his Wall Street pre-IPO meetings in his hoodie. When your company is ready and has the right numbers, the Wall Street Investment Banks will work with you, no matter where you are.

What about tech startups located in Menlo Park, Palo Alto, or Mountain View, close to Sand Hill Road? (Sticking to the geographical description of Silicon Valley.) Same thing, when your company is large enough to take the uber rounds, it does’t matter if you live in Menlo Park or Montana, or Mongolia, the VCs on Sand Hill Road in Menlo Park will work with you. You are already seeing this with startups being located in the City of San Francisco and not down south in Silicon Valley. The larger established companies such as Facebook (Menlo Park), Tesla (Palo Alto), Google (Mountain View), etc are down in Silicon Valley, but the young, early stage startups are up in San Francisco. This means San Fransisco is about the startups and Silicon Valley is about the money.

San Francisco is the new Silicon Valley. Silicon Valley is the new Wall Street.

I’m super lucky to be from New York City and have lived in both Europe and Asia before settling down in Silicon Valley two years ago. I’ve also been lucky to work at a startup in Eastern Europe that grew to be so successful that many of my former co-workers there have become either Angel investors in the region or left to do their own startups. Of course, Fresco Capital is geographically diverse with 2/3 of the partners overseas. Because of this I get to meet a large amount of startups from outside of Silicon Valley, particularly from overseas.

Typically when they come to Silicon Valley for the first time, I am their first visit. (Honored!) That said, they all ask me the exact same question: “Steve, we are about to raise our Seed round of $1m, can you introduce us to some investors that will put our round together?"

This is when I have to give the founder “The Talk."

The Talk(TM)

I say that raising a $1m Seed round in Silicon Valley is easy, just go to a Starbucks in Palo Alto and trip a few people and when they fall down, $100k will fall out of their hoodie. Aim for someone with a Facebook or Google hoodie and maybe $200k will fall out. While this is a (slight) exaggeration, the point is that most seed rounds that are not lead by an institutional investor are pieced together by wealthy Angel investors usually $200K or so at a time. While a foreign startup has the potential to meet Silicon Valley Angel investors on a two week visit, typically, you raise this money via a personal network. (Your’s or your advisor’s.) If you are not from the Valley, you won’t have this network and would need to stay and network for months and months, burning cash and wasting time (that should be used to build your startup).

I Know Nobody in the Valley, What Should I Do?

I always suggest to non-local entrepreneurs to go raise their seed round locally in their home market where they have a network of potential investors. It will be easier and faster than trying to raise money in the Valley where you don’t know anyone. You can then come to the Valley for your Series A from a position of strenght after you have nailed your business model.

This presents a problem insofar of the level of sophistication of the investors in your home market. While I agree that most markets are not nearly as sophisticated as Silicon Valley, there are “Valley” type investors in all markets these days, you just have to go find them. The easiest way: build an awesome business. I was talking with by buddy Pascal the other day about valuations in Europe compared to the Valley. Startups outside of the Valley tend to have less of the valuation inflation that the Valley startups do. If you build a sustainable, repeatable, scalable business with funding in your local market at a competitive valuation, when you come the Valley later on to raise a Series A, you will find it easy to raise money!

In my role at Fresco Capital and as an advisor to several startups, I’ve seen it all with founders: disputes over shares, disputes over money, disputes over a new laptop, founders break up, a founder falling ill, founders get married, founders get divorced, founders get into physical arguments. Often this leads to one founder completely disengaged from the business and still holding a significant amount of equity or even a board seat. We’ve seen this at large companies such as Microsoft and more recently at ZipCar. Typically you need this equity to hire executives or attract investors. Worse, if the company is being acquired, you now have one founder who can hold up the deal if they are on the board and disengaged. That of course is a problem, but one that can be solved with a dynamic founder agreement.

Founder Troubles

Most founders settle the division of equity question with a static founders agreement. It usually goes something like this:

Founder 1: 50%, vested over 4 years, 1 year cliff

Founder 2: 50%, vested over 4 years, 1 year cliff

This solves a lot of problems, such as if a founder leaves after two years, they will still have 25% of the company but give up the second half of their equity. What happens if one founder is not “pulling their own weight” or contributing enough to earn the vesting (in the other founder’s eyes) but did not leave the company? What happens if they have to leave due to illness or personal emergency? What happens if there is misaligned expectations as what skills a founder brings and what role a founder will play?

I’ve seen this happen at one of my own startups. One of our founders was a lawyer and at the time we sold the company, he could not represent us due to it being a clear conflict of interest. While the legal fees were not all that bad (maybe $50k), to this day, almost ten years later, my other co-founders are still mad at the lawyer co-founder. This was clearly misaligned expectations.

This is what Norm Wasserman calls the Founder’s Dilemma, or the unexpected consequences of not spelling out the roles and expectations of the founders early on combined with the unintended complications of a founder leaving early or disengaging. He suggests a dynamic founders agreement.

The Dynamic Founders Agreement

The dynamic founders agreement is a way to mitigate the risk of an underperforming founder by changing the equity based on pre-set parameters. For example say I am starting a company with my friend Sam. Sam and I agree to a 50-50 split with Sam being the “business guy” and me being the “tech guy". The assumption is that I will be the coder of V1 and lead the development team after we get funding. But what if I need to leave the company due to family emergency? What about if I decide that I don’t want to code anymore, before we can afford to hire a developer? What if I only give 30 hours a week and consult on the side?

A dynamic founders agreement is a big IF THEN ELSE statement that spells all of this out. IF Steve works as expected, his equity is 50%, if Steve has to leave the company, if he becomes disengaged, here is the pre-negotiated equity and if we have to buy Steve out, here are the terms. For example:

IF:

Steve works full time as CTO performing all the coding and technical duties of V1, his equity is 50%, vested over 4 years, 1 year cliff.

ELSEIF:

Steve works part time, is disengaged, or we need to hire developers sooner than expected, his vested equity is reduced by half and he forfeits his unvested equity. Loses board seat.

ENDIF:

If Steve has to leave the company because he needs a job or a family emergency: if Steve built V1 then the buyout is a one time payout of $50,000 USD cash or 2% vested equity, if Steve did not build V1, the buyout is 0.5% vested equity. Loses board seat.

Having a dynamic founders agreement won’t solve all of your problems, however, it will make the the process of removing a founder much less stressful. Sure some of the language in the dynamic founders agreement will be subject to interpretation, but the “spirit of the agreement” is much easier to follow or even if you have to litigate, more robust. If you never need to use the dynamic founders agreement, but built one anyway, it will force a frank and open conversation about roles and commitment among the founders. This only strengthens the relationship between founders, increasing the chances of success.